IAS 36 – Class notes

SCOPE

This standard shall not apply to:

(a) inventories (IAS 2);
(b) contract assets and assets arising from costs to obtain or fulfil a contract (IFRS 15);
(c) deferred tax assets (IAS 12);
(d) assets arising from employee benefits (IAS 19);
(e) financial assets (IFRS 9);
(f) investment property measured at fair value (IAS 40);
(g) biological assets measured at fair value less costs to sell (IAS 41);
(h) contracts within the scope of IFRS 17; and
(i) non‑current assets classified as held for sale (IFRS 5).

Exam notes:
For assets carried at revaluation model, following should be considered:
1. The only difference between “fair value” and “fair value less cost of disposal” is the direct
incremental costs attributable to the disposal of asset.
2. If cost of disposal is negligible then recoverable amount of asset must be equal to or greater than
fair value. Therefore, when both fair value and value in use are known, then asset is only revalued
to “fair value” and there is no need for impairment.
3. If cost of disposal is not negligible then “fair value less cost of disposal” is necessarily less than “fair
value”. Therefore, such asset is first revalued to “fair value” an3d then it is tested for impairment.
4. If fair value is not known and only value in use is known then asset is impaired if value in use is less
than carrying amount.
5. Although charging of impairment loss as per IAS 36 and revaluation loss as IAS 16/38 are same, but
accumulated depreciation is eliminated only at the time of revaluation as per IAS 16/38 and not at
the time of impairment as per IAS 36.

IDENTIFYING AN ASSET THAT MAY BE IMPAIRED

1. Impairment test is the comparison of “carrying amount determined as per relevant IAS” with
“recoverable amount”

2. Carrying amount is the amount at which an asset is recognised after deducting any accumulated
epreciation (amortisation) and accumulated impairment losses thereon.

3. The recoverable amount of an asset or a cash‑generating unit is the higher of:

 its fair value less costs of disposal
 its value in use.

Nasir Abbas FCA Page 1 | 10

 IAS 36 – Class notes

Timing of impairment testing:

- For intangible assets not yet available for use - For all other assets
- For intangible assets with indefinite life
- For Goodwill acquired in business combination

Impairment is tested annually
An entity shall assess at the end of each reporting
period whether there is any indication that an
asset may be impaired. If any such indication
exists, the entity shall estimate the recoverable
amount of the asset.

Indications of impairment

External sources of information

(a) the asset’s value has declined during the period significantly.
(b) significant changes with an adverse effect on the entity, in the technological, market, economic or
legal environment.
(c) market interest rates or other market rates of return on investments have increased and those
increases are likely to affect the discount rate used in calculating an asset’s value in use.
(d) the carrying amount of the net assets of the entity is more than its market capitalisation.

Internal sources of information

(e) Obsolescence or physical damage of an asset.
(f) significant changes with an adverse effect on the entity, in the extent to which, or manner in which,
an asset is used
(g) economic performance of an asset is, or will be, worse than expected.

Dividend from a subsidiary, joint venture or associate

(h) for an investment in a subsidiary, joint venture or associate, the investor recognises a dividend from
the investment and evidence is available that:
(i) the carrying amount of the investment in the separate financial statements exceeds the carrying
amounts in the consolidated financial statements of the investee’s net assets, including associated
goodwill; or
(ii) the dividend exceeds the total comprehensive income of the subsidiary, joint venture or associate
in the period the dividend is declared.

MEASURING RECOVERABLE AMOUNT

1. It is not always necessary to determine both an asset’s fair value less costs of disposal and its value in
use. If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it
is not necessary to estimate the other amount.

2. Sometimes it will not be possible to measure fair value less costs of disposal, In this case, the entity
may use the asset’s value in use as its recoverable amount.

Nasir Abbas FCA Page 2 | 10

 IAS 36 – Class notes

3. If an asset’s value in use is not expected to exceed its fair value less costs of disposal, the asset’s fair
value less costs of disposal may be used as its recoverable amount. This will often be the case for an
asset that is held for disposal.

4. If recoverable amount cannot be determined for an individual asset because it does not generate cash
inflows that are largely independent of those from other assets or groups of assets, then recoverable
amount is determined for the cash‑generating unit to which the asset belongs unless either:
(a) the asset’s fair value less costs of disposal is higher than its carrying amount; or
(b) the asset’s value in use can be estimated to be close to its fair value less costs of disposal and fair
value less costs of disposal can be measured.

Fair value less cost to sell

1. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. (See IFRS 13 Fair Value
Measurement.)

2. Costs of disposal are incremental costs directly attributable to the disposal of an asset or
cash‑generating unit, excluding finance costs and income tax expense.

3. Costs of disposal, other than those that have been recognised as liabilities, are deducted in
measuring fair value less costs of disposal.
Examples
legal costs, stamp duty and similar transaction taxes, costs of removing the asset, and direct
incremental costs to bring an asset into condition for its sale.
However, termination benefits (as defined in IAS 19) and costs associated with reducing or
reorganising a business following the disposal of an asset are not direct incremental costs to dispose
of the asset.

Value in use
1. Value in use is the present value of the future cash flows expected to be derived from an asset or
cash‑generating unit.

2. Estimating the value in use of an asset involves the following steps:

(a) estimating the future cash inflows and outflows to be derived from continuing use of the asset
and from its ultimate disposal; and
(b) applying the appropriate discount rate to those future cash flows.

Future cash flows

1. cash flows should reflect all possible variations in the amount or timing of future cash flows, the result
shall be to reflect the expected present value of the future cash flows, i.e. the weighted average of all
possible outcomes [Ʃpx].

2. Base cash flow projections on budgets/forecasts which shall cover a maximum period of five years,
unless a longer period can be justified. Extrapolate the projections based on the budgets/forecasts
using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified.

Nasir Abbas FCA Page 3 | 10

 IAS 36 – Class notes

3. Estimates of future cash flows shall include:

(a) projections of cash inflows from the continuing use of the asset;
(b) projections of cash outflows that are necessarily incurred to generate the cash inflows from
continuing use of the asset and can be directly attributed, or allocated on a reasonable and
consistent basis, to the asset; and
(c) net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful
life.
Net disposal value at the end of its useful life is determined in a similar way to fair value less
costs of disposal, except that, it now also includes adjustments for future price increases.

4. To avoid double‑counting, estimates of future cash flows do not include:

(a) cash inflows from other recognized assets (for example, financial assets such as receivables); and
(b) cash outflows for recognized liabilities (for example, payables, pensions or provisions).

5. Future cash flows shall be estimated for the asset in its current condition. Therefore, future cash flows
shall not include estimated future cash inflows or outflows that are expected to arise from:
(a) a future restructuring to which an entity is not yet committed; or
Once the entity is committed to the restructuring:
 its estimates of future cashflows reflect the cost savings and other benefits from the
restructuring; and
 its estimates of future cash outflows for the restructuring are included in a restructuring
provision in accordance with IAS 37.

(b) improving or enhancing the asset’s performance.

 Projections of cash outflows include those for the day‑to‑day servicing of the asset as well
as future cash outflows (e.g. future part replacements to be accounted for as capital
expenditure) necessary to maintain the level of economic benefits expected to arise from
the asset in its current condition.
 In case of capital work-in-progress, the future cash flows shall also include necessary capital
expenditure to get the asset ready for use or sale.

6. Estimates of future cash flows shall not include:

(a) cash inflows or outflows from financing activities; or
(b) income tax receipts or payments.

7. Future cash flows are estimated in the currency in which they will be generated and then discounted
using a discount rate appropriate for that currency. An entity translates the present value using the
spot exchange rate at the date of the value in use calculation.

Discount rate
The discount rate (rates) shall be a pre‑tax rate (rates) that reflect(s) current market assessments of:
(a) the time value of money; and
(b) the risks specific to the asset for which the future cash flow estimates have not been adjusted.

RECOGNITION AND MEASUREMENT OF IMPAIRMENT LOSS

Impairment loss = Carrying amount – Recoverable amount

Nasir Abbas FCA Page 4 | 10

 IAS 36 – Class notes

Accounting for impairment loss:

If asset is carried at cost model If asset is carried at revaluation model

Impairment loss shall be recognized in profit and Impairment loss shall be treated as a revaluation
loss immediately. decrease in accordance with relevant IAS (e.g. IAS
16, 38)

Dr. Impairment loss (P&L) Dr. Revaluation surplus

Cr. Accumulated impairment loss Dr. P&L
Cr. Accumulated impairment loss

 After charging impairment loss, depreciation shall be charged on revised carrying amount over
remaining life.
 When impairment loss is greater than carrying amount (i.e. when recoverable amount is negative),
then entity shall recognize a liability if and only if required by another IAS.

CASH GENERATING UNITS [CGU]

A cash‑generating unit is the smallest identifiable group of assets that generates cash inflows that are
largely independent of the cash inflows from other assets or groups of assets.

Identifying the CGU to which asset belongs

Example
A mining entity owns a private railway to support its mining activities. The private railway could be sold
only for scrap value and it does not generate cash inflows that are largely independent of the cash
inflows from the other assets of the mine.

It is not possible to estimate the recoverable amount of the private railway because its value in use
cannot be determined and is probably different from scrap value. Therefore, the entity estimates the
recoverable amount of the cash‑generating unit to which the private railway belongs, ie the mine as a
whole.

1. Identification of an asset’s cash‑generating unit involves judgement. If recoverable amount cannot be

determined for an individual asset, an entity identifies the lowest aggregation of assets that generate
largely independent cash inflows.

Example
A bus company provides services under contract with a municipality that requires minimum service on
each of five separate routes. Assets devoted to each route and the cash flows from each route can be
identified separately. One of the routes operates at a significant loss.

Because the entity does not have the option to curtail any one bus route, the lowest level of identifiable
cash inflows that are largely independent of the cash inflows from other assets or groups of assets is

Nasir Abbas FCA Page 5 | 10

 IAS 36 – Class notes

the cash inflows generated by the five routes together. The cash‑generating unit for each route is the
bus company as a whole.

2 In identifying whether cash inflows from an asset (or group of assets) are largely independent, an
entity considers various factors including how management monitors the entity’s operations (such as
by product lines, businesses, individual locations, districts or regional areas) or how management
makes decisions about continuing or disposing of the entity’s assets and operations. Illustrative
Example 1 gives examples of identification of a cash‑generating unit.

3. If an active market exists for the output produced by an asset or group of assets, that asset or group
of assets shall be identified as a cash‑generating unit, even if some or all of the output is used
internally. If such cash inflows are affected by internal transfer pricing, an entity shall use
management’s best estimate of future price(s) that could be achieved in arm’s length transactions in
estimating:
(a) the future cash inflows of giving asset or CGU; and
(b) the future cash outflows of receiving asset or CGU.

Recoverable amount and carrying amount of CGU

1. Recoverable amount of a CGU is determined using the same guidance as studied earlier for a single
asset.

2. Carrying amount of a CGU shall be determined on a basis consistent with the way recoverable amount
is determined.

3. The carrying amount of CGU should include carrying amounts of only those assets that can be
attributed directly or allocated on a reasonable basis to that CGU and does not include the carrying
amount of any recognized liability unless recoverable amount of the CGU cannot be determined
without consideration of this liability (for example inclusion of provision for dismantling will reduce
the carrying amount CGU for fair comparison with recoverable amount).

4. For practical reasons, the recoverable amount of a CGU is sometimes determined after consideration
of assets that are not part of the CGU (for example, receivables or other financial assets) or liabilities
that have been recognised (for example, payables, pensions and other provisions). In such cases, the
carrying amount of the CGU shall also include such assets and liabilities only for calculating
impairment loss.

Goodwill

Allocating goodwill to cash‑generating units

1. For the purpose of impairment testing, goodwill acquired in a business combination shall, from the
acquisition date, be allocated to each of the acquirer’s cash‑generating units, or groups of
cash‑generating units, that is expected to benefit from the synergies of the combination, irrespective
of whether other assets or liabilities of the acquiree are assigned to those units or groups of units.

Nasir Abbas FCA Page 6 | 10

 IAS 36 – Class notes

2. Goodwill sometimes cannot be allocated on a non-arbitrary basis to individual CGU, but only to groups
of CGUs.

Testing cash‑generating units with goodwill for impairment

1. When goodwill relates to a cash‑generating unit but has not been allocated to that unit, the unit shall
be tested for impairment, whenever there is an indication that the unit may be impaired, by
comparing the unit’s carrying amount, excluding any goodwill, with its recoverable amount.

2. A cash‑generating unit to which goodwill has been allocated shall be tested for impairment annually,
and whenever there is an indication that the unit may be impaired, by comparing the carrying amount
of the unit, including the goodwill, with the recoverable amount of the unit. If the recoverable amount
of the unit exceeds the carrying amount of the unit, the unit and the goodwill allocated to that unit
shall be regarded as not impaired.

Timing of impairment tests

1. If the assets constituting the cash‑generating unit to which goodwill has been allocated are tested for
impairment at the same time as the unit containing the goodwill, they shall be tested for impairment
before the unit containing the goodwill.

2. Similarly, if the cash‑generating units constituting a group of cash‑generating units to which goodwill
has been allocated are tested for impairment at the same time as the group of units containing the
goodwill, the individual units shall be tested for impairment before the group of units containing the
goodwill.

3. At the time of impairment testing a cash‑generating unit to which goodwill has been allocated, there
may be an indication of an impairment of an asset within the unit containing the goodwill. In such
circumstances, the entity tests the asset for impairment first, and recognises any impairment loss for
that asset before testing for impairment the cash‑generating unit containing the goodwill.

4. Similarly, there may be an indication of an impairment of a cash‑generating unit within a group of

units containing the goodwill. In such circumstances, the entity tests the cash‑generating unit for
impairment first, and recognises any impairment loss for that unit, before testing for impairment the
group of units to which the goodwill is allocated.

Corporate assets

1. Corporate assets are assets other than goodwill that contribute to the future cash flows of both the
cash‑generating unit under review and other cash‑generating units.

2. Corporate assets include group or divisional assets such as the building of a headquarters or a division
of the entity, EDP equipment or a research centre. The distinctive characteristics of corporate assets
are that they do not generate cash inflows independently of other assets or groups of assets and their
carrying amount cannot be fully attributed to the cash‑generating unit under review.

3. In testing a cash‑generating unit for impairment, an entity shall identify all the corporate assets that
relate to the cash‑generating unit under review. If a portion of the carrying amount of a corporate
asset:

Nasir Abbas FCA Page 7 | 10

 IAS 36 – Class notes

(a) can be allocated on a reasonable and consistent basis to that unit, the entity shall compare the
carrying amount of the unit, including the portion of the carrying amount of the corporate asset
allocated to the unit, with its recoverable amount and recognize any impairment loss.

(b) cannot be allocated on a reasonable and consistent basis to that unit, the entity shall:
(i) compare the carrying amount of the unit, excluding the corporate asset, with its recoverable
amount and recognize any impairment loss;
(ii) identify the smallest group of cash‑generating units that includes the cash‑generating unit
under review and to which a portion of the carrying amount of the corporate asset can be
allocated on a reasonable and consistent basis; and
(iii) compare the carrying amount of that group of cash‑generating units, including the portion of
the carrying amount of the corporate asset allocated to that group of units, with the
recoverable amount of the group of units and recognize any impairment loss.
Exam note
Recoverable amount of the group of CGUs should be given separately, however, if not given
separately then recoverable amounts of individual CGUs are added.

Impairment loss for a CGU

1. The impairment loss shall be allocated to reduce the carrying amount of the assets of the unit (group
of units) in the following order:
(a) first, to reduce the carrying amount of any goodwill allocated to the cash‑generating unit (group
of units); and
(b) then, to the other assets of the unit (group of units) pro rata on the basis of the carrying amount
of each asset in the unit (group of units).

2. These reductions in carrying amounts shall be treated as impairment losses on individual assets.

3. In allocating an impairment loss as above, an entity shall not reduce the carrying amount of an asset
below the highest of:
(a) its fair value less costs of disposal (if measurable);
(b) its value in use (if determinable); and
(c) zero.

The amount of the impairment loss that would otherwise have been allocated to the asset shall be
allocated pro rata to the other assets of the unit (group of units).

4. After allocating impairment loss as above, a liability shall be recognised for any remaining amount of
an impairment loss for a cash‑generating unit if, and only if, that is required by another IFRS.

REVERSING AN IMPAIRMENT LOSS

An entity shall assess at the end of each reporting period whether there is any indication that an
impairment loss recognised in prior periods for an asset other than goodwill may no longer exist or may
have decreased. If any such indication exists, the entity shall estimate the recoverable amount of that
asset.

Nasir Abbas FCA Page 8 | 10

 IAS 36 – Class notes

Indications of impairment loss reversal

External sources of information

(a) there are observable indications that the asset’s value has increased significantly during the period.
(b) significant changes with a favourable effect on the entity in the technological, market, economic or
legal environment.
(c) market interest rates or other market rates of return on investments have decreased during the
period to affect the discount rate used in calculating the asset’s value in use.

Internal sources of information

(d) significant changes with a favourable effect on the entity in the extent to which, or manner in which,
the asset is used or is expected to be used.
(e) evidence is available from internal reporting that indicates that the economic performance of the
asset is, or will be, better than expected.

An impairment loss recognised in prior periods for an asset other than goodwill shall be reversed if, and
only if, there has been a change in the estimates used to determine the asset’s recoverable amount since
the last impairment loss was recognised.

Reversal an impairment loss for an individual asset

Upper limit for reversal for individual asset

The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment
loss shall not exceed the carrying amount that would have been determined (net of amortisation or
depreciation) had no impairment loss been recognised for the asset in prior years.

Accounting for impairment loss reversal:

If asset is carried at cost model If asset is carried at revaluation model

Impairment loss reversal shall be recognized in Impairment loss shall be treated as a revaluation
profit and loss immediately. increase in accordance with relevant IAS (e.g. IAS
16, 38)

Dr. Acc. depreciation & impairment loss Dr. Acc. depreciation & impairment loss
Cr. P&L Cr. P&L
Cr. Revaluation surplus

After reversing impairment loss, depreciation shall be charged on revised carrying amount over
remaining life.

Reversing an impairment loss for a CGU

1. A reversal of impairment loss for a CGU shall be allocated the assets of the unit, except for goodwill,
pro rate with the carrying amounts of the assets

Nasir Abbas FCA Page 9 | 10

 IAS 36 – Class notes

2. These increases in carrying amounts shall be treated as reversals of impairment losses for individual
assets.

3. In allocating a reversal of impairment loss as above, an entity shall not increase the carrying amount
of an asset above the lowest of:
(a) its recoverable amount (if measurable); and
(b) the carrying amount that would have been determined (net of amortization or depreciation) had
no impairment loss been recognized for the asset in prior periods.

The amount of the reversal of impairment loss that would otherwise have been allocated to the asset
shall be allocated pro rata to the other assets of the unit (group of units), except for goodwill.

4. An impairment loss recognized for goodwill shall not be reversed in a subsequent period.

Nasir Abbas FCA Page 10 | 10